Motif Review | The Ultimate Antidote to Index Funds

November 8, 2012

This has got to be the most interesting investment proposition to come along in many years. If youâ€™ve got some time â€” and some spare cash to invest â€”Â Motif is definitely something worth checking out.

If youâ€™re like me, the first question that comes to mind is the name â€” why motif? According to Dictionary.com, the word motif is defined as:

â€1. a recurring subject, theme, idea, etc., especially in a literary, artistic, or musical work. 2. a distinctive and recurring form, shape, figure, etc., in a design, as in a painting or on wallpaper. 3. a dominant idea or feature: the profit motif of free enterpriseâ€

How does that relate to investments?

Motif attempts to construct investments based on social investing, which is to say the exchange of ideas between various investors. They have a Motif platform to facilitate investment concepts, so not only can you participate in the process, but new motifs are being created all the time. Investor consensus makes it happen.

How does Motif work?

It would be tempting to say that Motif is similar to mutual funds and exchange traded funds (ETFâ€™s) but that really isnâ€™t true. You are the direct owner of any stocks contained in a motif, even though you purchase them in a single motif and for just one fee.

Investment motifs are built around themes and ideas. The investment starts with a basic concept, say â€œtoo big to failâ€ (you can figure out what thatâ€™s about), then builds a portfolio of stocks that are most likely to benefit from the situation. In addition, Motif offers the ability to customize each investment by adding or deleting stocks or by changing the weightings within the motif.

Some of the more interesting investment motifs include:

Democratic Donors

Cloud Computing

The Seven Deadly Sins

Frankenfoods

Renter Nation

Shale Gas

Chinese Solar

For what itâ€™s worth, the majority of motifs listed have had positive returns over the past 12 months, most of them by double digits.

You can invest in a motif with as little as $250 (presumably with no maximum) for a commission fee of $9.95.

In addition to stock motifs, you can also enter fixed income ones constructed along similar lines. IRAâ€™s, both traditional and Roth, as well as rollovers are available with Motif.

The mechanics of a typical motif

One of the more interesting investments is the Income Inequality motif, defined as â€œhigh-end and low-end retailers that serve a society of extremesâ€. Youâ€™ve undoubtedly heard much over the past few years about the 1% who control most of the wealth versus the remaining 99%? Well, this is an investment thatâ€™s been built around that prospect from an investment standpoint. As Motif describes it,

Opportunity Knocks In A Two-sided Economy â€“Â With a bulge of money on one end and a bulge of people on the other, the barbell economy of the US is now well understood. This was loudly illustrated by the scores of â€œOccupyâ€ movements in 2011, which pitted â€œthe 99%â€ against â€œthe 1%.â€ And income inequality has grown over the past several years. According to the Federal Reserve, the top 1% of US households control 34.6% of the countryâ€™s wealth, while the bottom 90% only control 26.9%. The rich have gotten richer, the poor have become poorer, and the middle class is practically a nominee for the endangered species.

Interesting concept, wouldnâ€™t you say? The motif is invested in luxury and discount retailers, including Ralph Lauren, Tiffany & Co., Sothebys, and Steinway Musical on the high end, and Big Lots and several dollar stores on the lower end. Roughly 70% of the motif is invested in luxury retailers, and 30% to discounters. Thatâ€™s not an even split, but the motif has returned better than 20% in the most recent year.

But be on the lookoutâ€¦

Though each motif can invest in up to 30 stocks, most of them have less â€“ often far less. What this means is that there isnâ€™t tremendous diversification within a given industry or idea. And while this can mean above average returns in rising market, it could have just the opposite effect in a decline.

Motif only started in 2010, so as interesting a concept as it is, we canâ€™t know if its individual motifs will prove to be enduring investments â€” thereâ€™s just no history here.

The $9.95 commission fee is high in comparison to transaction fees at most discount brokerages, however that is being used to purchase an very unique and often customized investment that is not available at other brokerages.

If you decide to change the stocks in a given motif, there is a charge of $4.95 per transaction. That can get pretty expensive if you make multiple changes.

Itâ€™s also important to realize that while each motif comes â€œpre-packagedâ€, there is no professional investment management, unlike ETFâ€™s and mutual funds. Motif is not a place for the novice stock investor.

How Motif Can Work for You

Motif probably isnâ€™t an investment concept that youâ€™d want to put all or most of your money into. Itâ€™s too highly specialized and the company and its concept havenâ€™t been around long enough to justify a major investment.

But if you have an otherwise balanced portfolio and are looking for some small speculations to add to the mix, Motif could be the place to find them. You might, for instance, keep 90%-95% of your money in your regular portfolio, but add 5%-10% in some of the motifs that you think have real potential. As a speculative investment vehicle â€” with some diversification within the concept â€” Motif could be the perfect way to make this happen.

Have you ever invested through Motif? What do you think about it?

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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.